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The new 2017 Insolvency Rule sees big changes for creditors

View profile for John King
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The new 2017 Insolvency Rule sees big changes for creditors

After five years, just four in ten small businesses will still be trading. According to National Statistics, the total number of company insolvencies was higher in 2016 than in the previous year which has been attributed to 1,796 connected personal service companies entering liquidation on the same date following changes to claimable expenses rules.  If these are excluded, the number of company insolvencies was broadly unchanged in 2016 compared with 2015.

This April, new rules come into play which represent the biggest change to insolvency law in 30 years.  These aim to consolidate the Insolvency Rules 1986 and its 28 subsequent amendments and see a modernisation of some of the more antiquated processes. This will hopefully speed up the process and lower overall costs, leaving more money in the estate for distribution among the insolvent company’s creditors. And it’s not just the Rule’s content which is changing: the language used has become more user-friendly to limit the chance of misinterpretation, too.

So what changes can creditors expect?

A move to digital

Several communication changes have been implemented. One of these is the increased use of email throughout the insolvency process. A creditor who has engaged in an email exchange with the debtor prior to the start of insolvency proceedings will be deemed as having consented to receive documents by email going forward. This consent can be revoked at any point.

Along with the emails, there will be more increased reliance on digital platforms, such as web portals allowing certain documents to be downloaded by creditors. However, some of the more important papers will continue to be delivered by more traditional channels.

Abolishment of compulsory creditors meetings

Under Section 98 of the Insolvency Act 1986, when a company began voluntary liquidation a physical meeting of its creditors had to take place. At least one Director had to attend the meeting to explain to why the company had failed. However, under the new ruling this will be replaced by a ‘qualifying decision procedure’ which will take the form of a virtual meeting, such as a telephone conference or Skype call. At that meeting, the creditors will make decisions regarding the appointment of the Liquidator and any other matters pertinent to the liquidation.

However, if 10% of the creditors or 10% in number of the creditors or 10 creditors request a physical meeting, this must be held instead. This would be more likely in certain high profile liquidations with a large number of creditors, especially members of the public.

Deemed consent

By way of further confusion, the concept of ‘deemed consent’ has also been introduced. This is an alternative to the ‘qualifying decision procedure’. Effectively, creditors are to be advised in advance what decisions are to be made on a certain date and in the absence of the appropriate number of relevant creditors objecting, those decisions are taken as being confirmed. One example of such a decision would be the appointment of a Liquidator.

Ability for creditors to ‘opt out’ of receiving certain notices

The new rules will allow creditors to opt out of receiving on-going correspondence; this is primarily geared towards situations where there is little hope of the creditors receiving any monies from the liquidation process. This however, excludes notices of dividend payments, which will continue to be sent regardless of whether the opt-out option has been triggered.

Changes for small creditors

Creditors with smaller claims no longer need to submit proof to the Insolvency Practitioner. Rather, the financial records and accounts of the insolvent company will be used to check claims from creditors which are under £1,000.

No more final meetings

Along with the end of Section 98 creditors meetings, the updated rules also signal the end of the final meeting which is currently used to formally conclude the insolvency proceedings and releases the Insolvency Practitioner from duty. From April 2017 this process, along with any creditor objections, will be performed through email to speed up the process while also reducing the financial cost.

John King, Partner and specialist in Commercial Law at FDR Law, advises a large number of businesses on a wide variety of commercial matters including commercial agreements, corporate acquisitions and disposals. For advice on insolvency, contact him on 01925 230000 or by email John.King@fdrlaw.co.uk